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| CVU > SEC Filings for CVU > Form 10-Q on 12-Nov-2008 | All Recent SEC Filings |
12-Nov-2008
Quarterly Report
The following discussion should be read in conjunction with the Company's Condensed Financial Statements and notes thereto contained in this report.
Forward Looking Statements
When used in this Form 10-Q and in future filings by us with the Securities and
Exchange Commission, the words or phrases "will likely result," "management
expects" or "we expect," "will continue," "is anticipated," "estimated" or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Readers are
cautioned not to place undue reliance on any such forward-looking statements,
each of which speaks only as of the date made. Such statements are subject to
certain risks and uncertainties that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. The risks are included in "Item 1A: Risk Factors" of our Annual
Report on Form 10-K for the year ended December 31, 2007 and "Item 2:
Management's Discussion and Analysis of Financial Condition and Results of
Operations" included in this Form 10-Q. We have no obligation to publicly
release the result of any revisions which may be made to any forward-looking
statements to reflect anticipated or unanticipated events or circumstances
occurring after the date of such statements.
Business Operations
We are engaged in the contract production of structural aircraft parts principally for the U.S. Air Force and other branches of the U.S. armed forces, either as a prime contractor or as a subcontractor for other defense prime contractors. Our strategy for growth has focused on government and military sales as a prime contractor and increasingly as a subcontractor for leading aerospace prime contractors.
Due to our success as a subcontractor to defense prime contractors and growth in the commercial sector, we are also pursuing opportunities to increase our commercial subcontracting business.
Among our major recent awards are:
· A long-term requirements contract of approximately $70 million from The Boeing Company for assemblies for 242 enhanced wings for the A-10 "Thunderbolt" attack jet. The initial orders under this contract were for $13.2 million.
· An initial order of $7.9 million as part of a $98 million agreement by a leading global aerospace and defense company to provide structural kits for an in-production aircraft. The 8-year agreement has the potential to generate up to $150 million in revenue over the life of the program.
· A long-term multi-million dollar contract from Spirit AeroSystems for major aerostructure assemblies for the Gulfstream G650 aircraft for which we will build fixed leading edge assemblies. We anticipate that this contract will generate significant revenue for us in the future. The initial order is valued at approximately $3.5 million and we expect to record approximately $3 million of revenue under this contract during 2008. Deliveries of these assemblies will begin in 2009 and continue through 2014.
The lengths of our contracts vary but are typically between nine months and two years for U.S. government contracts (although our T-38 contract and our C-5 TOP contract are for periods of ten years and seven years, respectively), and up to ten years for commercial contracts. Except in cases where contract terms permit us to bill on a progress basis, we must incur upfront costs in producing assemblies and bill our customers upon delivery. Because of the upfront costs incurred, the timing of our billings and the nature of the percentage-of-completion method of accounting described below, there can be a significant disparity between the periods in which (a) costs are expended, (b) revenue and earnings are recorded and (c) cash is received.
Critical Accounting Policies
Revenue Recognition
We recognize revenue from our contracts over the contractual period under the percentage-of-completion ("POC") method of accounting. Under the POC method of accounting, sales and gross profit are recognized as work is performed based on the relationship between actual costs incurred and total estimated costs at the completion of the contract. Recognized revenues that will not be billed under the terms of the contract until a later date are recorded as an asset captioned "Costs and estimated earnings in excess of billings on uncompleted contracts." Contracts where billings to date have exceeded recognized revenues are recorded as a liability captioned "Billings in excess of costs and estimated earnings on uncompleted contracts." Changes to the original estimates may be required during the life of the contract. Estimates are reviewed monthly and the effect of any change in the estimated gross margin percentage for a contract is reflected in cost of sales in the period the change becomes known. The use of the POC method of accounting involves considerable use of estimates in determining revenues, costs and profits and in assigning the amounts to accounting periods. As a result, there can be a significant disparity between earnings (both for accounting and taxes) as reported and actual cash received by us during any reporting period. We continually evaluate all of the issues related to the assumptions, risks and uncertainties inherent with the application of the POC method of accounting; however, we cannot assure you that our estimates will be accurate. If our estimates are not accurate or a contract is terminated, we will be forced to adjust revenue in later periods. Furthermore, even if our estimates are accurate, we may have a shortfall in our cash flow and we may need to borrow money to fund our work in process or to pay taxes until the reported earnings materialize to actual cash receipts.
Stock-Based Compensation
We account for compensation expense associated with stock options in accordance with Statement of Financial Accounting Standards ("SFAS") No. 123R, "Share-Based Payment."
Item2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
Results of Operations
Revenue
Revenue for the three months ended September 30, 2008 was $9,434,095 compared to $7,256,709 for the same period last year, representing an increase of $2,177,386 or 30%. For the nine months ended September 30, 2008, revenue increased $6,133,910 or 30% to $26,353,255, compared to $20,219,345 for the nine months ended September 30, 2007. The increase in revenue is primarily the result of efforts to increase our military and commercial subcontracting business.
We generate revenue primarily from government contracts for which we act as a prime contractor or as a subcontractor and, to a lesser extent, from commercial contracts. Revenue generated from prime government contracts for the nine months ended September 30, 2008 was $13,420,867 compared to $14,199,636 for the nine months ended September 30, 2007, a decrease of $778,769 or 5.5%. Revenue generated from government subcontracts for the nine months ended September 30, 2008 was $8,781,648 compared to $4,627,812 for the nine months ended September 30, 2007, an increase of $4,153,836 or 90%. Revenue generated from commercial contracts was $4,150,740 for the nine months ended September 30, 2008 compared to $1,391,897 for the nine months ended September 30, 2007, an increase of $2,758,843 or 198%.
During the nine months ended September 30, 2008, we received approximately $49.7 million of new contract awards, which included approximately $9 million of government prime contract awards, approximately $31 million of government subcontract awards and approximately $9.7 million of commercial subcontract awards, compared to a total of $18.9 million of new contract awards, of all types, in the same period last year.
Even with the large contract awards announced during the first nine months of 2008, we still had approximately $290 million in formalized bids outstanding, as of September 30, 2008 and continue to make bids on contracts on a weekly basis. In addition, we currently have other proposals submitted to multiple prime contractors, for both government and commercial subcontracting opportunities. While we cannot predict the probability of obtaining or the timing of awards, some of these outstanding proposals are significant in amount and any single award could increase our revenue and net income substantially.
Gross Profit
Gross profit for the three months ended September 30, 2008 was $2,158,193 compared to $1,993,620 for the three months ended September 30, 2007, an increase of $164,573. As a percentage of revenue, gross profit for the three months ended September 30, 2008 was 23% compared to 27% for the same period last year. For the nine months ended September 30, 2008, gross profit was $6,011,879, or 23% of revenue, compared with $5,540,920, or 27% of revenue for the first nine months of last year. The decrease in gross margin percentage was 1% higher than expected as the Company incurred more overtime and other personnel costs than initially planned as we prepare for increased delivery requirements in the remainder of 2008 and the first half of 2009. The Company has commenced work on various long-term programs that tend to be less profitable in the early stages and has been shifting its business towards more subcontracting work, which is more price competitive. Accordingly, the Company expects gross margin percentage to remain in the 23%-25% range for the foreseeable future.
Selling, General and Administrative Expenses Selling, general and administrative expenses for the three months ended September 30, 2008 were $806,071 compared to $1,131,484 for the three months ended September 30, 2007, a decrease of $325,413, or 29%.The decrease is primarily due to a $220,000 decrease in accrued bonus and a $100,000 decrease in accounting and legal fees.
For the nine months ended September 30, 2008, selling, general and administrative expenses were $3,469,981 compared to $3,317,147 for the same period last year, an increase of $152,834, or 4.6%. This increase was primarily due to an $80,000 increase in consulting fees for our increased sales effort, a $100,000 increase in non-cash fees for stock options issued as compensation to our board of directors, a result of the higher valuation, on the same number of options issued, based on the Black-Sholes option pricing model, a $56,000 increase in accounting and legal fees, which includes increased fees for Sarbanes-Oxley 404 compliance and a $31,000 increase in bank charges, offset by a $62,000 decrease in salaries and a $53,000 decrease in moving expenses.
Income Before Provision for Income Taxes
Income before provision for income taxes for the three months ended September 30, 2008 was $1,352,122 compared to $862,136 for the same period last year, an increase of $489,986. For the nine months ended September 30, 2008, income before provision for income taxes was $2,541,898 compared to $2,223,773 for the same period last year, an increase of $318,125.
Provision for Income Taxes
Provision for income taxes was $860,000 for the nine months ended September 30, 2008, or 34% of pre-tax income. For the three months ended September 30, 2008, the provision for income taxes was $460,000, or 34% of pre-tax income. Provision for income taxes was $845,000 and $327,000 for the nine and three months ended September 30, 2007, respectively, or 38% of pre-tax income. The decrease in tax rate as a percentage of pre-tax net income is the result of the 2008 provision for income taxes being calculated at only the Federal income tax rate. We do not expect to have a state tax obligation for 2008 because of New York States' adoption of a "sales only" income allocation method.
Net Income
Basic net income for the three months ended September 30, 2008 was $892,122, or $0.15 per basic share, compared to basic net income of $535,136, or $0.09 per basic share, for the same period last year. For the nine months ended September 30, 2008, basic net income was $1,681,898, or $0.28 per basic share, compared to basic net income of $1,378,773, or $0.24 per basic share, for the same period last year. Diluted income per share for the three months ended September 30, 2008 was $0.14 calculated utilizing 6,252,685 average shares outstanding. Diluted income per share for the nine months ended September 30, 2008 was $0.27, calculated utilizing 6,217,010 average shares outstanding. Diluted income per share for the three months ended September 30, 2007 was $0.09, calculated utilizing 6,145,930 average shares outstanding. Diluted income per share for the nine months ended September 30, 2007 was $0.23, calculated utilizing 5,989,138 average shares outstanding.
Liquidity and Capital Resources
General
At September 30, 2008, we had working capital of $31,846,127 compared to $28,716,968 at December 31, 2007, an increase of $3,129,159, or 11%.
Cash Flow
A large portion of our cash is used to pay for materials and processing costs associated with contracts that are in process and which do not provide for progress payments. Contracts that permit us to bill on a progress basis must be classified as "on time" for us to apply for progress payments. Costs for which we are not able to bill on a progress basis are components of "Costs and estimated earnings in excess of billings on uncompleted contracts" on our balance sheets and represent the aggregate costs and related earnings for uncompleted contracts for which the customer has not yet been billed. These costs and earnings are recovered upon shipment of products and presentation of billings in accordance with contract terms.
Because the POC method of accounting requires us to use estimates in determining revenue, costs and profits and in assigning the amounts to accounting periods, there can be a significant disparity between earnings (both for accounting and tax purposes) as reported and actual cash that we receive during any reporting period. Accordingly, it is possible that we may have a shortfall in our cash flow and may need to borrow money until the reported earnings materialize into actual cash receipts.
At September 30, 2008, we had a cash balance of $577,705 compared to $338,391 at December 31, 2007. Our costs and estimated earnings in excess of billings increased by approximately $4,701,732 during the nine months ended September 30, 2008. The increase in costs and estimated earnings in excess of billings on uncompleted contracts and accounts payable was primarily due to higher levels of procurement and production related to work on new contract awards and advances made to expedite delivery of tooling required for our new long-term contract with Spirit.
Credit Facilities
Sovereign Bank
In August 2007, we entered into a two-year, $2.5 million revolving credit facility with Sovereign Bank (the "Sovereign Revolving Facility"), secured by all of our assets. The Sovereign Revolving Facility specifies an interest rate equal to the lower of LIBOR plus 2% or Sovereign Bank's prime rate. The effective rate as of September 30, 2008 was 5.00%. The Sovereign Revolving Facility contains financial covenants related to interest coverage, net income and capital expenditures, as defined in the credit agreement. As of September 30, 2008, we were in compliance with all of the financial covenants contained in the credit agreement. As of September 30, 2008, we had $2.5 million outstanding under the Sovereign Revolving Facility.
On October 22, 2008, we obtained a $3 million term loan from Sovereign Bank to be amortized over five years (the "Sovereign Term Facility"). Prior to entering into the term loan we had borrowed $2.5 million under the Sovereign Revolving Facility to fund the initial tooling costs related to the previously mentioned long-term contract with Spirit. We used the proceeds from the Sovereign Term Facility to repay the borrowings under the Sovereign Revolving Facility and to pay for additional tooling related to the Spirit contract. The Sovereign Term Facility bears interest at LIBOR plus 2.5% and is secured by all of our assets.
Concurrent with entering into the Sovereign Term Facility, Sovereign Bank amended the terms of the Sovereign Revolving Facility extending the term until August 2010 and amending the covenants, as defined, commencing in the fourth quarter of 2009.
The terms and conditions of the Sovereign Revolving Facility are applicable to the Sovereign Term Facility.
Additionally, the Company and Sovereign Bank entered into a five year interest rate swap agreement, in the notional amount of $3 million. Under the interest rate swap, the Company pays an amount to Sovereign Bank representing interest on the notional amount at a rate of 5.8% and receives an amount from Sovereign representing interest on the notional amount at a rate equal to the one-month LIBOR plus 2.5%. The effect of this interest rate swap will be the Company paying a fixed interest rate of 5.8% over the term of the Sovereign Term Facility.
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